ARMENIA'S ENERGY SITUATION: DEALING WITH DEVILS

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 000631

SIPDIS

SIPDIS

EUR/CARC, EUR/PRA, INSN/RA, ISN/SC, EUR/ACE AND NEA/ARPI

E.O. 12958: DECL: 05/05/2016
TAGS: KNNP ENRG PARM PREL IR RS AM
SUBJECT: ARMENIA'S ENERGY SITUATION: DEALING WITH DEVILS

REF: YEREVAN 492

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Classified By: Amb. John M. Evans for reasons 1.4 (b, d).

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SUMMARY
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1. (C) While official Armenia insists that the incomplete
Iran-Armenia gas pipeline was not included in the recent
Hrazdan 5 energy-for-infrastructure agreement with Russia
(reftel),the specific details of the midnight deal remain
unclear. In response to the Ambassador's inquiries during
May 2 U.S.-Armenia Task Force (USATF) meetings, Deputy
Minister of Energy Areg Galstyan and Minister of Finance
Vardan Khachatryan gave a wide-ranging overview of Armenia's
energy situation, noting that the GOAM would continue to
depend on the Armenian Nuclear Power Plant, Armenia's largest
producer of electricity, until a comparable alternative -- a
new nuclear power plant -- was installed. Galstyan also
called for the refurbishment of Armenian gas storage
facilities. Khachatryan said that, despite public criticism
of the GOAM's decision to trade components of Armenia's
remaining energy infrastructure to Russia, the sale of the
incomplete 5th Unit of the Hrazdan Thermal Power Plant
amounted to an Armenian victory over the Russians, who had to
outbid the Iranians for ownership. Though he avoided
specifics about the future of the incomplete Iran-Armenia
pipeline, Khachatryan said Armenia would sell the pipeline
"to the devil" if the devil would pay for the construction.
End Summary.

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U.S.-ARMENIA TASK FORCE DISCUSSES ENERGY
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2. (C) At the semi-annual U.S.-Armenia Task Force (USATF)
meetings May 2 in Yerevan, Minister of Finance Vardan
Khachatryan and Deputy Minister of Energy Areg Galstyan sped
through the GOAM's talking points on upgrading Armenia's
natural gas storage capacity, decommissioning the old and
building a new nuclear power plant, and developing Armenia as
a regional energy hub. Khachatryan responded to the
Ambassador's points about the need for transparency and
launched into a passionate, wide-ranging monologue about
Armenia's energy security strategy. Khachatryan forcefully
defended the GOAM's decision to continue to operate the ANPP,
to sell the 5th Unit of the Hrazdan Thermal Power Plant, and
to seek the best price for the Iran-Armenia pipeline.

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GOAM CONFIRMS COMMITMENT TO DECOMMISSIONING
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3. (C) Deputy Minister of Energy Areg Galstyan took the lead
on discussions related to the Armenian Nuclear Power Plant
(ANPP) and said Armenia's position had not changed. He
confirmed that the GOAM would be ready to move ahead with
decommissioning as soon as alternative sources of energy were
available. Galstyan explained that, based on recommendations
made by USAID-contractor PA Consulting and others at the
December 2005 IAEA-sponsored conference on decommissioning in
Vienna, the GOAM had prepared a report on decommissioning and
how best to build replacement capacity. Galstyan also said
that the GOAM planned to host another meeting of
international experts to discuss this matter in Yerevan in
the near future.

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UPGRADING STORAGE CAPACITY
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4. (C) Galstyan underscored the need for increased energy
security and said that Armenia needed to have a diversified
energy sector. He mentioned that refurbishment of Armenia's
gas storage facilities would greatly enhance Armenia's energy
independence and estimated that storage upgrades would cost
approximately USD 30 million. There was no mention of
cooperation with Georgia on this project.

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NEW NUCLEAR PLANT TO HELP MEET REGIONAL ENERGY NEEDS?
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5. (C) In terms of building replacement capacity for the

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ANPP, Galstyan identified two scenarios, a thermal scenario
and a nuclear one. He said that the nuclear scenario had
"many advantages both in ecological and economic terms."
According to Galstyan, the GOAM hopes to replace the current
400 megawatt ANPP with a plant with a capacity of 1,000
megawatts, both to meet Armenia's growing energy needs and
because the GOAM believed the new plant "will have an
important role in regional development."


6. (C) Ambassador Evans responded to Galstyan's comments
saying that the U.S. appreciated the GOAM commitment to
decommissioning and that, while the U.S. would continue to
assist with safety upgrades for the plant, "any credible plan
for safety upgrades must be based on a transparent end
point." Evans explained that before the U.S. "would even
consider supporting a feasibility study for a new plant, we
(the USG) need to fully understand the strategy."

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DECOMMISSIONING FUND: A GOOD IDEA, BUT...
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7. (C) U.S. Department of Treasury representative Jeff Baker
raised the issue of a decommissioning fund to help cover the
costs of closing the ANPP. He said the IMF has identified
the need to pay for decommissioning as the biggest threat to
Armenia's long-term fiscal sustainability and suggested that
Armenia should consider an additional energy tariff to help
cover the anticipated costs. Khachatryan said the idea of a
decommissioning fund was a good one, but that Armenia would
not be able to cover the full cost of decommissioning itself
and would need support from the donor community both for
decommissioning and to develop replacement capacity.

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THE PRESS OVERSTATES U.S. POSITION
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8. (C) EUR/ACE Coordinator Tom Adams, Ambassador Evans and
Minister Khachatryan also discussed decommissioning at a
press conference following the USATF meeting. At the event,
Adams said that the U.S. would consider helping Armenia pay
for the research needed to make a final decision about
replacements for ANPP and underscored the need for additional
information before a final decision is made. He also raised
concerns about building a second nuclear plant in a seismic
zone. Some press reports erroneously interpreted Adams'
comments as evidence that the U.S. was opposed to the
construction of a new nuclear power plant in Armenia under
any circumstances.

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DESPITE PUBLIC OUTCRY, SALE OF HRAZDAN AN ECONOMIC VICTORY
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9. (C) In response to Ambassador Evans' inquiries, Minister
of Finance Vardan Khachatryan told the visiting USATF
delegation that, far from a disaster for the GOAM, the
decision to sell the 5th Unit of the Hrazdan Thermal Power
Plant (TPP) was a "great deal." Khachatryan said that the
Russians had expressed interest in Hrazdan's 5th Unit on
several occasions previously, but that when Armenia announced
the tender "they went silent." Khachatryan called the
incomplete 5th Unit "a bunch of rotting rubble and rusty
metal." The Russian offer (reportedly USD 248.8 million) was
"just a gift, something we could not dream of," he said.
According to Khachatryan Iran had offered about USD 140
million but sought about USD 60 million in co-financing from
Armenia. Better than the Iranian deal, the Russian offer,
Khachatryan said, allowed Armenia to retain the USD 60
million and gain an operational, upgraded facility. In terms
of the potential political implications of the sale,
Khachatryan said, "It doesn't matter what color the cat is,
so long as it catches mice." "And besides," he said, "you
should be happy the deal with Iran didn't go ahead. You
should welcome this deal."

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IRAN-ARMENIA PIPELINE: "WE'LL SELL IT TO THE DEVIL ..."
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10. (C) The Iran-Armenia pipeline was not included in the
Hrazdan energy-for-infrastructure trade, Khachatryan told the
Ambassador. (Note: Gazprom announced on April 6 that, along
with the transfer of control of the 5th Unit of the Hrazdan

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TPP, Russian would also gain control of 40 kilometers of the
Iran-Armenia pipeline. Gazprom pulled the initial version of
the press release from its website, and later posted an
amended version which omitted reference to the Iran-Armenia
pipeline as part of the deal (reftel) End note.) Saying
that any discussion about the sale of the incomplete
Iran-Armenia pipeline was "theoretical, because the pipeline
doesn't even exist," Khachatryan said Armenia would "sell the
pipeline to the devil," if the devil would pay for
construction. "Whoever pays the money, will earn the right
to construct it," he continued. Khachatryan estimated
construction of the second phase of the pipeline would cost
approximately USD 160 million.


11. (U) EUR/ACE Coordinator Tom Adams did not clear this
cable.
EVANS